We've all been dealing with a chaotic market.
The biggest challenge now is to find the silver lining of all this chaos. We've been laser focused on organising this year's volatility into three main market shocks: slowing growth, inflation, and interest rate volatility.
We at Janus Henderson always stress the point that time in the market beats timing the market, but also how we can help our clients to translate those shocks into opportunities.
That's easier said than done. So, we're excited to help by introducing Janus Henderson's 2023 Market GPS Investment Outlook.
Within equities, there's been very little room to hide. In the US, the historical spike in bond yields drove a painful sell off, and now the main focus is turning to the earnings outlook.
Matt Peron, our Director of Research, lays out what he expects in earnings season ahead and what equity investors should look for in companies.
Of course, stable earnings are a hallmark of quality investing, and this is one of the reasons quality has become a common theme this year. But quality isn't just one thing, it's multifaceted. So we've developed our MOAT framework to help investors map this year's market shocks to the most relevant aspects of quality investing. This approach is designed to identify quality companies which can mitigate and maybe even capitalise on today's biggest risks.
Ex-US equities are not only dealing with the historical spike in bond yields, but also with their unique set of geopolitical risks. It's important to stay the course here because, for a global equity investor, ex-US developed equities are a key source of diversification into mature, high-dividend, cyclical exposures.
Going back to 1970, across the globe, dividend growth and dividend yield historically have generated the majority of real return in equities over the long run. That means dividends are especially critical for equity portfolios in this high inflation environment.
But high dividends can also be a red herring for structurally declining companies and value traps. Active management is crucial here to focus on sustainable cash flows and strong balance sheets necessary to drive consistent portfolio income.
Unfortunately, equities haven't been the only asset class in trouble. The global aggregate core bond benchmark is having its worst year in history. But we believe that investors can benefit from market dislocations and really find mid- and high-single-digit yield opportunities.
Jim Cielinski, our Global Head of Fixed Income, outlines that government bond yields are likely range-bound or even poised to outperform if today's economic slowdown turns into a recession. In that environment, core high-quality investment grade fixed income is likely to revert back to its traditional role as a portfolio ballast when equity markets sell off.
Outside the core, in non-investment grade high yield markets, investors have been dreaming about these high single-digit or even double-digit yields, but Jim wisely cautions that, even though these yields are exciting, high yield markets will continue to be sensitive to economic weaknesses on the horizon. With that kind of backdrop, investors shouldn't miss out on that level of yield, but they should consider multi-sector strategies that are much more flexible and broad than a strategy constrained to a typical single-sector high yield benchmark.
Outside of traditional stock and bond portfolios, investors are finding a new appreciation for alternatives that can be long, short, and unconstrained by traditional benchmarks – all of which can work together to provide a diversifying exposure and help smooth the ride throughout volatile years.
As you will see from David Elms and Steve Cain from our Diversified Alternatives team, the key measures of success in this space are stable, non-directional returns that are able to provide a differentiated source of returns in clients’ portfolios.
Keep in mind that alternatives are powerful, but before adding them to a portfolio, investors need to set themselves up for success by taking a step back and using a goals-based approach.
This means specifically identifying the role alternatives are meant to serve, whether it's to diversify away from equities or fixed income, or maybe to dampen overall portfolio volatility. And then be intentional about your funding source and benchmarking.
Going back to where we started, unfortunately, investors will have to continue to grapple with those market shocks – slowing growth, inflation, and interest rate volatility. Fortunately, history tells us that patient investors have experienced much more upside than downside following periods like this.
The Market GPS Insights provide a playbook for the next stage of the cycle and will give you a feel for the silver lining that comes with today's market volatility.
Overview
